For cryptocurrencies? Airdrop what is
Cryptocurrency Airdrop is a marketing strategy that involves sending coins or tokens to wallet addresses. Small amounts of new virtual currency are sent to the wallets of active members of the blockchain community for free or in exchange for a small favor, such as retweeting a post sent by the company issuing the currency. The ultimate goal of a cryptocurrency airdrop is to promote awareness and circulation of a new token or currency.
Cryptocurrency Airdrop is a marketing tactic used by cryptocurrency startups.
It involves delivering tokens to the wallets of existing cryptocurrency traders, either for free or in exchange for a small promotional favor.
*The air distribution aims to spread awareness and increase ownership of the emerging currency.
*While some are legitimate, other Airdrops have been considered scams when trying to steal wallet or personal information.
* Airdrops may be based on people expressing interest, holding existing codes, being intentionally selected, or winning a draw.
Understanding Cryptocurrency Airdrops
A cryptocurrency airdrop is a promotional activity typically conducted by blockchain-based startups to help bootstrap a virtual currency project. Its goal is to spread awareness about the cryptocurrency project and attract more people to trade in it when it is listed on the platform as an initial coin offering (ICO).
Airdrops are generally promoted on the company's website, social media, and cryptocurrency forums. Coins or tokens are only sent to specific wallets based on the blockchain network or coins in existing wallets.
To qualify for the free gift, the recipient may need to hold a minimum amount of cryptocurrencies in their wallet. Instead, they may need to perform a specific task, such as posting about the currency on a social media forum, communicating with a specific member of a blockchain project, or writing a blog post.
Types of cryptocurrency drops
1- Standard airdrop
In a standard cryptocurrency airdrop, participants interested in receiving the airdrop simply express their interest in order to receive the airdrop. The individual must provide a valid wallet address, and some airdrops do not require any additional information beyond that.
Standard airdrops often have a set amount of tokens to distribute with a limit on the number of tokens each individual may receive. Therefore, some standard airdrops are time sensitive. Although these types of airdrops are popular due to their simplicity, there is nothing stopping a single user from creating multiple wallets to quickly drain the airdrop amount, so they may be more difficult to obtain.
- Air Bonus 2- Bounty Airdrop
Reward airdrops occur when users perform certain tasks. These tasks often include raising awareness of the project by posting on social media, tagging the company, or retweeting a recent tweet about the project. There may also be referral bonuses or finder fees for individuals who recruit other users, sign up for the project's newsletter, or join the company's Discord channel.
In exchange for performing tasks, users often receive points that correspond to the size of the reward they receive. Users may also be required to earn a certain amount of points before they qualify for their airdrop. For example, a user may be eligible for an Airdrop after earning 300 points with each item listed above worth 100 points each.
3- Exclusive airdrop
A more specific type of holder airdrop, an exclusive cryptocurrency airdrop occurs when specific people are individually selected for the airdrop. The difference is that they may be selected not based on the amount of tokens they have but on other elements such as time spent on the project, most money spent on non-token activities, or number of forum posts. An exclusive airdrop is a more centralized way to reward people closest to the project and may offer an airdrop to wallets that may not contain any tokens at all.
4- Raffle Airdrop
Some of the above types of airdrops can be combined with tow airdrops. Often times, the project will mention the number of airdrops it intends to offer and encourage individuals to win a lottery ticket. This ticket can be earned by holding tokens, earning points, or simply expressing interest.
Ultimately, the number of individuals interested in an airdrop often exceeds the number of airdrops the company is willing to deliver. Therefore, a draw is conducted and a limited number of wallets are randomly selected to receive the airdrop.
Cryptocurrency Airdrop Process
The cryptocurrency airdrop process begins when a project or company decides there is a need for an airdrop. This may be in response to market strategies, a hard fork in the network, or to stimulate existing investors. The first step is to determine how to facilitate the airdrop and who is qualified.
The next step for large-scale, public airdrops is to launch a general campaign. This includes gathering information for interested parties; This is often limited to portfolio addresses only, although companies may also collect email addresses to grow their contact list.
Other types of airdrops may rely on a snapshot, which is a snapshot of an instance that identifies who has certain parameters. For example, the project might perform a snapshot to identify all addresses with at least 1,000 tokens as of midnight on December 31. Any parameters that occur after the shot will not affect the results of the airdrop; Therefore, coin or token prices often fluctuate in response to when snapshots are taken.
Once a list of airdrop recipients is determined, the drop is often facilitated through the use of smart contracts. A company may choose to use its own treasury wallet to facilitate the airdrop, and the company will often publish the block of transactions to prove the fairness of the airdrop. The transaction will show that the airdrop comes out of the company's wallet and is distributed to the recipients.
Airdrop recipients often receive coins or tokens directly without having to accept tokens. Some may need to add the token or currency along with its address to their wallet to properly display their wallet balance of the token.
Cryptocurrency Drop Scams
A legitimate cryptocurrency airdrop never seeks to invest capital in the currency. Its purpose is purely promotional. On the other hand, some cryptocurrency scams involve sending small amounts of Bitcoin or other cryptocurrencies to unsuspecting recipients in what is known as a dust scam.
Many airdrop scams rely on instructing an investor to link their wallet to a phishing website in order to claim their airdrop. Often times, the web3 address will prompt the user to link their wallet using common and popular wallet services such as MetaMask, Trust Wallet, or Oasis. After the user links their wallet by providing their secret phrase or keys, the scam is complete.
Airdrop scams may also occur by urging market participants to invest in a particular security in the hope that a different item will be dropped from the air. For example, a project might boast that holding certain NFT tokens in a wallet will result in owners receiving a rare airdrop. Although airdrops may be legitimate, project owners may have lured NFT market activity so they can sell their products at a higher price.
How to Avoid Airdrop Scams
Users should always be careful about unwanted deposits in their cryptocurrency wallets. In addition, users should be aware of the projects they are investing in or trying to claim assets for. A popular phrase among cryptocurrency explorers is “do your own research.”
Cryptocurrency enthusiasts are advised not to connect to websites they are not familiar with. This includes ensuring that the external links they click on come directly from the project. Consider bookmarking popular sites you plan to visit frequently to ensure you're always connected to the right site.
Companies often advertise airdrops and other promotions. Consider following the project on social media, forums, or Discord to keep tabs on upcoming events, and be aware that sophisticated scams may duplicate or imitate a project's social media profiles.
If you don't want airdrops to be tied to underlying investments, consider creating a new portfolio dedicated to airdrops. After receiving the tokens, you can then transfer the tokens to different wallets. Although holding cryptocurrencies in different wallets is not a form of traditional diversification, it does spread out and reduces overall risk.
Airdrops and crypto taxes
Whether or not an airdrop is a taxable event depends on the jurisdiction in which the token holder lives. In the United States, cryptocurrency airdrops are considered income as part of your federal income tax return.
The difficulty with reporting taxes on an airdrop is that the token may not yet have easily assessable liquidity or fair market value. Airdrops should be recognized as income at their fair value when received. Additionally, airdrops are not considered taxable income until an individual controls the token. If the airdrop is locked-in or on a vesting schedule, it is not considered taxable income until it is received and can be traded.
If the airdrop price falls after receipt and is later sold, this transaction creates a second, unrelated transaction that occurs at a capital loss.
The taxpayer will recognize income for the amount of the airdrop, and then recognize a loss equal to the difference between the airdrop price and the sale price. If the price should rise, short-term or long-term gains may be taxed based on the holding period.
Advantages and disadvantages of cryptocurrency airdrops
1- Advantages
Given the intense competition among cryptocurrency startups, the airdrop is an attempt to stand out from the crowd. Some companies dedicated to cryptocurrency airdrops offer user alerts, listing services for startups, as well as a range of marketing services to set up their airdrops. As always, there are good and bad businesses in this field.
Michael J. Casey, chair of the CoinDesk Advisory Board and an advisor to MIT's Blockchain Research Initiative, argued in a post on the CoinDesk blog that some type of marketing is necessary if we want cryptocurrency to succeed. “A currency is worthless if it is not widely used,” he wrote. “This cannot be achieved unless people make some costly effort to encourage widespread use.”
Some cryptocurrency airdrops also have the feature of rewarding loyal customers of specific blockchain networks. Additionally, sending airdrops to all existing wallets or token holders results in tokens being widely distributed in a way that may not occur naturally on the open market.
2- Defects
However, there are several issues to consider regarding cryptocurrency drops. The obvious concern is the safety of the network, especially the “recovery” nature of airdrops. For example, some airdrops may claim that users should link their wallet to suspicious websites; Once the connection to web3 is made, the thief may now have access to your user keys or password.
Cryptocurrency drops may not be legitimate either. Although tempting due to the nature of receiving free funds, some projects entice stakeholders to increase their airdrop stake by purchasing more tokens. Ultimately, the long-term goal may be to “attract investors” by dumping large amounts of tokens into the market at once, crashing the price and rendering previous airdrops worthless.
Some may view airdrops as low-quality projects. Some may instead prefer to focus on rewarding miners or other contributors to the network rather than issuing free tokens to non-major contributors to the project.
Finally, because airdrops may lack liquidity, airdrops may be literally worthless if they cannot be traded on an open exchange. Often times, as a result of the start of the project, airdrops may claim to be worth thousands of dollars. However, without the ability to openly trade the dropped tokens, the free gift to wallet holders may be worthless.
Crypto Airdrops
Positives
Rewarding early adopters or people involved in a project who have a stake in the project
Increases awareness of the project due to the marketing aspect of the airdrop
It encourages the use and adoption of the newly issued token
Tokens may be distributed to holders in a way that would not normally occur in the open market
cons
May pose security threats if wallet holders have to link wallets to suspicious websites to claim airdrops
They may prove to be “pump and dump” schemes.
Some investors may be discouraged from participating if they prefer different ways of distributing tokens
It may be worthless if the token is not liquid on the platform
Cryptocurrency Drops vs. Initial Coin Offerings (ICO)
table of contents
Cryptocurrency
Airdrop for Cryptocurrency: What it is and how it works
By INVESTOPEDIA Team Updated May 11, 2024
Reviewed by Doritha Clemon
Fact verified by Susanne Kvilhaug
Airdrop cryptocurrency
Investopedia/Jules Garcia
What is a Cryptocurrency Airdrop?
Cryptocurrency airdrop is a marketing strategy that involves sending coins or tokens to wallet addresses. Small amounts of new virtual currency are sent to the wallets of active members of the blockchain community for free or in exchange for a small favor, such as retweeting a post sent by the company issuing the currency. The ultimate goal of a cryptocurrency airdrop is to promote awareness and circulation of a new token or currency.
Main sockets
Cryptocurrency airdrop is a marketing method used by cryptocurrency startups.
It involves delivering tokens to the wallets of existing cryptocurrency traders, either for free or in exchange for a small promotional favor.
The airdrop aims to spread awareness and increase ownership of the emerging currency.
While some are legitimate, other airdrops are viewed as fraudulent when trying to steal wallet or personal information.
Airdrops may be based on those expressing interest, holding existing codes, being intentionally selected, or winning a drawing.
Understanding Cryptocurrency Airdrops
A cryptocurrency airdrop is a promotional activity typically conducted by blockchain-based startups to help bootstrap a virtual currency project. Its goal is to spread awareness about the cryptocurrency project and attract more people to trade in it when it is listed on an exchange as an initial coin offering (ICO).
Airdrops are generally promoted on the company's website, social media, and cryptocurrency forums. Coins or tokens are only sent to specific wallets based on the blockchain network or coins in existing wallets.
To qualify for the free gift, the recipient may need to hold a minimum amount of cryptocurrencies in their wallet. Instead, they may need to perform a specific task, such as posting about the currency on a social media forum, communicating with a specific member of a blockchain project, or writing a blog post.
Cryptocurrency airdrops are appropriately named in reference to actual airdrops using aircraft. Airdrops using aircraft entail the delivery of resources (such as weapons, food, or medicine) that actually fall from the sky.
Types of cryptocurrency drops
Standard airdrop
In a standard cryptocurrency airdrop, participants interested in receiving the airdrop simply express their interest in order to receive the airdrop. The individual must provide a valid wallet address, and some airdrops do not require any additional information beyond that.
Standard airdrops often have a set amount of tokens to distribute with a limit on the number of tokens each individual may receive. Therefore, some standard airdrops are time sensitive. Although these types of airdrops are popular due to their simplicity, there is nothing stopping a single user from creating multiple wallets to quickly drain the airdrop amount, so they may be more difficult to obtain.
Air reward
Reward airdrops occur when users perform certain tasks. These tasks often include raising awareness of the project by posting on social media, tagging the company, or retweeting a recent tweet about the project. There may also be referral bonuses or finder fees for individuals who recruit other users, sign up for the project's newsletter, or join the company's Discord channel.
In exchange for performing tasks, users often receive points that correspond to the size of the reward they receive. Users may also be required to earn a certain amount of points before they qualify for their airdrop. For example, a user may be eligible for an Airdrop after earning 300 points with each item listed above worth 100 points each.
Airdrop holder
Holder cryptocurrency drops happen automatically based on who holds existing tokens and how many tokens they hold. Since wallets and blockchain information are part of a publicly distributed ledger, all blockchain users have full transparency into wallets and token distribution.
The downside to an airdrop holder is that individuals who may hold the tokens may not want to airdrop. Instead, carrier airdrops ensure that only the largest, most invested individuals receive the benefit. Some airdrops may only grant the holder an airdrop if members hold a certain amount of tokens; Otherwise, they may divide the prize amount pro rata.
Airdrop exclusively
A more specific type of holder airdrop, an exclusive cryptocurrency airdrop occurs when specific people are individually selected for the airdrop. The difference is that they may be selected not based on the amount of tokens they have but on other elements such as time spent on the project, most money spent on non-token activities, or number of forum posts. An exclusive airdrop is a more centralized way to reward people closest to the project and may offer an airdrop to wallets that may not contain any tokens at all.
Atmospheric clouds
Some of the above types of airdrops can be combined with tow airdrops. Often times, the project will mention the number of airdrops it intends to offer and encourage individuals to win a lottery ticket. This ticket can be earned by holding tokens, earning points, or simply expressing interest.
Ultimately, the number of individuals interested in an airdrop often exceeds the number of airdrops the company is willing to deliver. Therefore, a draw is conducted and a limited number of wallets are randomly selected to receive the airdrop.
Never share your private keys with people you don't know or trust.
Cryptocurrency Airdrop Process
The cryptocurrency airdrop process begins when a project or company decides there is a need for an airdrop. This may be in response to market strategies, a hard fork in the network, or to stimulate existing investors. The first step is to determine how to facilitate the airdrop and who is qualified.
The next step for large-scale, public airdrops is to launch a general campaign. This includes gathering information for interested parties; This is often limited to portfolio addresses only, although companies may also collect email addresses to grow their contact list.
Other types of airdrops may rely on a snapshot, which is a snapshot of an instance that identifies who has certain parameters. For example, the project might perform a snapshot to identify all addresses with at least 1,000 tokens as of midnight on December 31. Any parameters that occur after the shot will not affect the results of the airdrop; Therefore, coin or token prices often fluctuate in response to when snapshots are taken.
Once a list of airdrop recipients is determined, the drop is often facilitated through the use of smart contracts. A company may choose to use its own treasury wallet to facilitate the airdrop, and the company will often publish the block of transactions to prove the fairness of the airdrop. The transaction will show that the airdrop comes out of the company's wallet and is distributed to the recipients.
Airdrop recipients often receive coins or tokens directly without having to accept tokens. Some may need to add the token or currency along with its address to their wallet to properly display their wallet balance of the token.
Cryptocurrency Drop Scams
A legitimate cryptocurrency airdrop never seeks to invest capital in the currency. Its purpose is purely promotional. On the other hand, some cryptocurrency scams involve sending small amounts of Bitcoin or other cryptocurrencies to unsuspecting recipients in what is known as a dust scam.
Many airdrop scams rely on instructing an investor to link their wallet to a phishing website in order to claim their airdrop. Often times, the web3 address will prompt the user to link their wallet using common and popular wallet services such as MetaMask, Trust Wallet, or Oasis.
After the user links their wallet by providing their secret phrase or keys, the scam is complete.
Airdrop scams may also occur by urging market participants to invest in a particular security in the hope that a different item will be dropped from the air. For example, a project might boast that holding certain NFT tokens in a wallet will result in owners receiving a rare airdrop. Although airdrops may be legitimate, project owners may have lured NFT market activity so they can sell their products at a higher price.
How to Avoid Airdrop Scams
Users should always be careful about unwanted deposits in their cryptocurrency wallets. In addition, users should be aware of the projects they are investing in or trying to claim assets for. A popular phrase among cryptocurrency explorers is “do your own research.”
Cryptocurrency enthusiasts are advised not to connect to websites they are not familiar with. This includes ensuring that the external links they click on come directly from the project. Consider bookmarking popular sites you plan to visit frequently to ensure you're always connected to the right site.
Companies often advertise airdrops and other promotions. Consider following the project on social media, forums, or Discord to keep tabs on upcoming events, and be aware that sophisticated scams may duplicate or imitate a project's social media profiles.
If you don't want airdrops to be tied to underlying investments, consider creating a new portfolio dedicated to airdrops. After receiving the tokens, you can then transfer the tokens to different wallets. Although holding cryptocurrencies in different wallets is not a form of traditional diversification, it does spread out and reduces overall risk.
Cryptocurrency transactions - including airdrops - have developed complex tax legislation that requires care and consideration. If you are unsure of the taxable status of a cryptocurrency transaction, consult a tax professional.
Airdrops and crypto taxes
Whether or not an airdrop is a taxable event depends on the jurisdiction in which the token holder lives. In the United States, cryptocurrency airdrops are considered income as part of your federal income tax return.
1
The difficulty with reporting taxes on an airdrop is that the token may not yet have easily assessable liquidity or fair market value. Airdrops should be recognized as income at their fair value when received. Additionally, airdrops are not considered taxable income until an individual controls the token. If the airdrop is locked-in or on a vesting schedule, it is not considered taxable income until it is received and can be traded.
If the airdrop price falls after receipt and is subsequently 1-sold, this transaction creates a second, unrelated transaction that occurs at a capital loss.
The taxpayer will recognize income for the amount of the airdrop, and then recognize a loss equal to the difference between the airdrop price and the sale price. If the price should rise, short-term or long-term gains may be taxed based on the holding period.
Advantages and disadvantages of cryptocurrency airdrops
Advantages
Given the intense competition among cryptocurrency startups, the airdrop is an attempt to stand out from the crowd. Some companies dedicated to cryptocurrency airdrops offer user alerts, listing services for startups, as well as a range of marketing services to set up their airdrops. As always, there are good and bad businesses in this field.
Michael J. Casey, chair of 2CoinDesk's advisory board and an advisor to MIT's Blockchain Research Initiative, argued in a post on the CoinDesk blog that some type of marketing is necessary if we want cryptocurrency to succeed. “A currency is worthless if it is not widely used,” he wrote. “This cannot be achieved unless people make some costly effort to encourage widespread use.”
Some cryptocurrency airdrops also have the feature of rewarding loyal customers of specific blockchain networks. Additionally, sending airdrops to all existing wallets or token holders results in tokens being widely distributed in a way that may not occur naturally on the open market.
cons
However, there are several issues to consider regarding cryptocurrency drops. The obvious concern is the safety of the network, especially the “recovery” nature of airdrops. For example, some airdrops may claim that users should link their wallet to suspicious websites; Once the connection to web3 is made, the thief may now have access to your user keys or password.
Cryptocurrency drops may not be legitimate either. Although tempting due to the nature of receiving free funds, some projects entice stakeholders to increase their airdrop stake by purchasing more tokens. Ultimately, the long-term goal may be to “attract investors” by dumping large amounts of tokens into the market at once, crashing the price and rendering previous airdrops worthless.
Some may view airdrops as low-quality projects. Some may instead prefer to focus on rewarding miners or other contributors to the network rather than issuing free tokens to non-major contributors to the project.
Finally, because airdrops may lack liquidity, airdrops may be literally worthless if they cannot be traded on an open exchange. Often times, as a result of the start of the project, airdrops may claim to be worth thousands of dollars. However, without the ability to openly trade the dropped tokens, the free gift to wallet holders may be worthless.
Cryptocurrency drop
Positives
Rewarding early adopters or people involved in a project who have a stake in the project
Increases awareness of the project due to the marketing aspect of the airdrop
It encourages the use and adoption of the newly issued token
Tokens may be distributed to holders in a way that would not normally occur in the open market
cons
May pose security threats if wallet holders have to link wallets to suspicious websites to claim airdrops
They may prove to be “pump and dump” schemes.
Some investors may be discouraged from participating if they prefer different ways of distributing tokens
It may be worthless if the token is not liquid on the exchange
Cryptocurrency Drops vs. Initial Coin Offerings (ICO)
Cryptocurrency drops and initial coin offerings may seem very similar. Both will likely occur at the beginning of the project, and both are intended to distribute coins or tokens.
Cryptocurrency drops may not require an investment, while ICOs often require a transaction. Although the deal may reward investors by offering coins or tokens at a discounted price, investors are expected to purchase coins or tokens instead of free drops. Initial coin offerings (ICOs) are often offered first to venture capitalists.
In addition, the demographics of these two events are vastly different. Initial coin offerings (ICOs) attempt to attract larger investors who want to inject capital into the project. These users are more likely to pursue the project as an investment. Instead, the goal of airdrops is often to raise awareness among younger users. Although users may not benefit much from a small drop, the goal is to entice younger users to transact with the cryptocurrency.
Real world examples
At the end of 2021, the Gas DAO was formed to distribute tokens to individuals who paid a certain threshold for Ethereum gas fees. The concept was that ownership of the DAO would be tied to the largest users of Ethereum. 55% of Gas DAO tokens were dropped into 634,429 eligible wallets.
Also at the end of 2021, OpenDao distributed tokens to NFT holders based on OpenSea trading activity. Ownership of OpenDao tokens will be distributed based on NFT ownership, forming an entity structure led by the most ambitious collectors.
At its peak, OpenDao had a market cap of over $250 million. As of September 2022, its market capitalization has fallen below $11 million.
What is the first cryptocurrency airdrop?
The first cryptocurrency airdrop is attributed to AuroraCoin (AUR) on March 25, 2014. It was intended to be the cryptocurrency of the country of Iceland, with each citizen or permanent resident who presented their national ID card receiving 31.8 AUR.
What is NFT Airdrop?
Similar to other types of cryptocurrency drops, NFT airdrops give NFT holders additional tokens. This is done to build a stronger community around certain NFTs, create buzz, and reward NFT holders.
How can I find cryptocurrency drops?
Cryptocurrency drops are often communicated and marketed to the general public to increase excitement and awareness regarding the token. Many of these airdrops can be found by subscribing to airdrop newsletters or following blockchains on social media.
Can you make money from cryptocurrency drops?
Individuals can make money from cryptocurrency airdrops, although cryptocurrency airdrops aim to increase cryptocurrency usage across a wide range of users. For this reason, airdrops are often not large amounts (less than $10), and tokens may not be liquid. There is also a greater risk that users will attempt to liquidate their holdings when they are able to (thus depreciating the value of the coins or tokens quickly).
Bottom line
Cryptocurrency drops are a way for companies and projects to raise awareness of their tokens or coins. It is also a way to increase the liquidity of their security by offering it to thousands of different wallets. Although airdrops have value and can be considered free money, there are also significant risks if users are not aware of potential scams related to cryptocurrency drops.
Investing in cryptocurrencies and other initial coin offerings (“ICOs”) is risky and speculative, and this article is not a recommendation by Investopedia or the author to invest in cryptocurrencies or other ICOs. Because each individual's situation is unique, you should always consult a qualified professional before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
Reference links:
https://www.binance.com/en/megadrop
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